Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.

I use the word “crank” because Randy
uses the word SEVENTEEN times in his article in reference to the Chicago Plan. The simpletons who are impressed by pejorative words will presumably be as impressed by my use of them as Randy's use of them.

Anyway, Randy has just published an article
at Economonitor attacking the full reserve / Chicago idea. I left a comment,
but Randy (and indeed UKMC’s
blog) often don’t publish comments that are critical of their articles. So I’m
repeating a version of my criticism here.

Randy clearly doesn’t have much idea
as to what full reserve banking consists of. His worst mistake is the claim
that “In its modern dress, the proposal is to set up a centralized
nongovernmental committee of experts to decide who gets the loans.”

Nowhere in any of the literature
produced by advocates of full reserve does it say that. Indeed, the literature makes it perfectly clear that banks or similar private sector lending entities continue to decide who gets credit. And unlike Randy, I’ve
actually read much of the relevant literature.

Bank subsidies.

But let’s run thru his article from
the start. He says (I’ve put his words in green):

“However, with a central bank that acts as a lender of last resort
and with the treasury providing deposit insurance, our payments system is
perfectly safe.”

Well of course! But lender of last
resort and deposit insurance provided by taxpayers is a SUBSIDY of banking. And
subsidies misallocate resources, as it explains in the introductory economics
text books.

Incidentally, Walter Bagehot, writing
150 years ago did not approve of lender of last resort. See the last chapter of
his book, “Lombard Street”.

Randy puts the total subsidy at $29
trillion of subsidised loans. That is ONE HELL OF A SUBSIDY. Is he seriously
suggesting there is no misallocation of resources there?

Even crazier is the trillions of lost
GDP and thousands of suicides that resulted from our clapped out banking system’s
collapse five years ago.

The Postal System.

He then suggests that the Postal
Saving System “does the payments system”. That amounts (far as I can see)
to something very near to what advocates of full reserve / Chicago plan
propose. That is, the latter propose that money transfers are only done using
accounts that are 100% reserve, i.e. 100% backed by base money.

However, under his Postal Saving
System proposal, everyone and every firm would need to open an account at the
postal system. In contrast, under full reserve / Chicago system advocated by
Positive Money, everyone would use their EXISTING BANK: much more convenient.

Thin air money.

Next, he says, “So we’ll eliminate that
kind of banking, and just let narrow banks take in deposits and then buy safe
treasuries. No more money creation out of thin air.”

Wrong. As the many advocates of full
reserve / Chicago explain perfectly clearly, money is still created out of thin
air: it’s just that that function is performed only by the central bank.

Sharing profits with borrowers.

Next: “The savers effectively
share in the rewards or the losses incurred by the investors.” Correct.
And what’s wrong with that? Savers have tens of trillions invested in stock
exchanges where they “share in the rewards or the losses…”. Where’s the
problem?

Next, Randay says “As an enterprise
model, this is as old as the hills…” And what exactly is wrong with “old”
ideas? The idea that two plus two makes four is an old idea.

I can’t be bothered reading any
further.

That’s got us about half way thru
Randy’s article. Given the large number of blunders, I’m not going to waste
time reading any further right now. But I might do when time permits.

Sunday, 29 June 2014

Money
creation by private or commercial banks takes place, first when a bank lends on
money deposited at the bank. To illustrate, when $X is deposited and loaned on,
both the borrower and the depositor then possess $X, thus $X has been turned
into $2X.

Second,
the commercial bank system can create money from thin air by lending without
reference to whether it has enough deposits to “fund” that lending. That is
banks simply credit borrowers with $Y, and that $Y is then deposited by whoever
receives that money.

Under
full reserve, all lending entities (whether they call themselves banks or not)
have to be funded just by shareholders rather than by depositors, loans from
the wholesale money market, bonds, etc.

Now
money is a liability of a bank which is FIXED IN VALUE (inflation apart). That
is, a dollar issued by a central bank or commercial bank is guaranteed to be
worth very nearly the same 48 hours later. (Or to be more accurate, if
inflation is anywhere near the 2% target, then that dollar’s value will not
fall by more than about 0.01%)

But
shares different. Shares rise and fall by significant amounts. Thus shares are
never counted as part of a country’s money supply anywhere in the World. So if
someone buys $Z of shares in a bank and the bank lends on $Z, no money creation
takes place.

Thus
enforcing full reserve (or at least the above aspect of full reserve) is easy
compared to the Byzantine complexity that is Dodd-Frank and similar forms of
recent and near useless bank regulation in other countries. All the authorities
need do is keep an eye on the balance sheets of banks and make sure there
aren’t any depositors there.

As
to those who don’t want to “risk losing value”, i.e. those who want to lodge a
given sum and ensure that they get exactly that sum back (in real terms) under
full reserve, they’re catered for by entities or accounts where relevant sums
are simply lodged at the central bank and/or (as advocated by Milton Friedman)
some of that money is invested in short term government debt. Obviously that
money (unlike shares) is totally safe, or as near totally safe as it is
possible to get.

Bitcoin changes value.

An
obvious exception to the idea that money is not money if it changes
significantly in value is Bitcoin, which has changed value dramatically over
recent years. My answer to that is that Bitcoin types of money will just never
take off in a serious way until they’re guaranteed to keep their value. The
vast majority of individuals and firms are not interested in seeing the
contents of their bank accounts suddenly halve in value.

Moreover,
if an when a Bitcoin type of money DOES become more or less fixed in value, it
is then performing the same function as a central bank. And the idea that
governments and central banks are going to stand for anyone intruding on their
territory in any big way is just nonsense. Bitcoin has already been banned in
Russia.

Anyone can create money?

The
above method of curtailing private money creation might seem ineffective in
that, as Minsky amongst others pointed out, anyone can create money. And indeed
they can – in theory. For example INDIVIDUAL PEOPLE can try issuing IOUs.
Unfortunately money is defined in economics dictionaries and economics text
books as “anything widely accepted in payment for goods and services” or words
to that effect. And the idea that an individual person can buy weekly groceries
or a car by giving the shop or garage a bit of paper inscribed with the words
“I owe the bearer of this bit of paper $A” is pure fantasy. Even small firms
would have difficulties doing that.

Thus
under full reserve, the authorities just wouldn’t need to keep an eye on
individual people, small firms or even the smallest shadow banks. It’s only the
larger firms and corporations that would need watching.

But
that’s not to say that under full reserve there would ever be a 100% watertight
ban on private money creation, especially since there is no sharp diving line
between money and non-money. For example short term government debt is
sometimes used in the world’s financial centres in lieu of money. Or you can
try using bottles of whiskey as money if you want. The latter might work to a
very limited extent in a few cases. (I actually pay a friend of mine who helps
me with my PC with whiskey, strange to relate, because he won’t accept money.
Computer geeks are normally a bit odd.)

Banks would try to circumvent the rules.

It’s
a 100% certain that banks would try every trick in the book to circumvent the
rules of full reserve. But then it’s a 100% certain they’ll try to circumvent
ANY RULES or laws. Banks are quasi criminal organisations. J.P.Morgan was
recently fined $20bn for various crimes. Yes, billion not million.

But
to repeat, at least the rules of full reserve are simple. So to that extent
they’re easy to enforce.

Portraying shares as money.

One
trick that banks would try is to have just shareholders on the liability side
of their balance sheets, while arranging for the value of those shares to
remain constant, and allowing “depositor / investors” to draw checks on or do
debit card transactions based on depositor / investors’ accounts at the bank.

Arranging
for the value of shares to remain constant is relatively easy where depositors’
money is loaned out only to safe borrowers, e.g. mortgagors who have a minimum
20% or so equity stake in their homes.

However
that ruse is easily dealt with. First it can be made illegal to draw checks on
a stake in a bank which consists nominally of shares. Indeed under the full
reserve system advocated by Positive
Money, checks and plastic card transactions can only be funded by the above
mentioned totally safe accounts.

Second,
it would be easy to stipulate that any literature or web sites relating to bank
shares make it abundantly clear that there is no FDIC type insurance for the
relevant “money”. Indeed that sort of stipulation has been in force in the UK
for years in that ALL LITERATURE relating to shares and mutual funds (“unit
trusts” in the UK) says something in bold print about the possibility of the
relevant stake possibly falling in value. (That applies of course just to
non-money market mutual funds. Money market mutual funds (assuming they invest
in nothing more risky than short term government debt, would be classified as
“totally safe” under full reserve.))

The UK’s National Savings and Investments.

Anyone
who thinks there is a problem in running totally safe accounts should ponder
the fact that accounts of this sort already exist in the UK: supplied by
“National Savings and Investments”. And doubtless some other countries have
something similar. NSI is a government run savings bank which invests only in
government debt. It does not issue check books or plastic cards, but it DOES
TRANSFER depositors’ money within 24 hours to any other bank account the depositor
wants. And of course it’s a very small step from that to a system which also issues check books and debit cards.

Friday, 27 June 2014

I like it, plus I think I recognise the voice in it: I think it's an Oxbridge physicist who has authored stuff for PM before: Michael Reiss. This is another PM video which Reiss definitely produced.But I'm only GUESSING about the voices in those videos - be warned.

____________

P.S. (29th June). Since the above, they're produced another video. I suspect I'll disagree with some aspects of it, but will have a look.

The
Federal Deposit Insurance Corporation is a government run, self-funding
insurance system for small banks in the US.

Most
of us want a banking system that offers depositors total security, even when a
bank goes bust. FDIC is one method of achieving that, and another is full
reserve banking. Or to be more accurate, what full reserve offers depositors is
two types of account. One offers total security, but that is achieved by doing
nothing the faintest bit risky with the money involved (the money is simply
lodged at the central bank and/ or invested in short term government debt). And
the second type of account involves lending on money in a more risky manner
(e.g. to mortgagors and businesses). But in that case, depositors carry the
full cost when those loans fail. In effect, those depositors are bank
shareholders.

So which is better: FDIC or full reserve?

Like
full reserve, FDIC involves depositors in paying pretty much the full costs of
what they engage in, or put another way it involves depositors carrying the
cost of any losses made by their bank: they just pay via an insurance premium.

It
can well be argued that under both systems, part of the cost is passed on to
borrowers. But let’s assume to keep things simple that the PROPORTION of costs
passed on the borrowers is the same in both cases (full reserve and FDIC).

Bank
failure under FDIC.

Under
FDIC, when a bank’s assets fall to some proportion of it’s liabilities (90%,
80%, or whatever), the bank is closed down, FDIC grabs and sells off the assets
and reimburses depositors from both the proceeds of sale of those assets plus
the fund of money that FDIC has built up as a result of charging insurance
premiums.

As
to bank shareholders, they of course take a hair cut: maybe a 100% haircut –
that is, they’re wiped out.

Under
full reserve, there’s no need for FDIC because a bank or lending entity funded
just by shareholders cannot suddenly go bust (though it can decline due to bad
management over a period of time). Or as George Selgin
put it in his book “The Theory of Free Banking”, “For a balance sheet without
debt liabilities, insolvency is ruled out”.

The
apparent advantage of FDIC.

So
what’s the advantage of the conventional or existing system under which banks
are funded predominantly by depositors or similar types of short term
creditors, with shareholders providing only a small proportion of the bank’s
funds and with FDIC acting as backstop?

Well
the advantage seems to be that commercial banks can create a form of money:
undoubtedly a useful service. That is, banks SPECIFICALLY make that
asset/liability liquid so as to turn it into a form of money. Plus the VALUE of
each unit of those liabilities is fixed in value (inflation apart). That is,
you can guarantee that a dollar or pound Sterling (unlike shares) won’t drop in
value by more than about 0.01% in the next 48 hours.

And
that “more or less fixed in value” characteristic is near essential if the
relevant liability is to be classified as money. Reason is that one of the
essential ingredients of money, as per text book definition of the word, is
that money is a “measure of value”. And just as you cannot measure the length
of something with an elastic tape measure, you cannot measure the value of
anything with a form of money whose OWN VALUE keeps changing.

An
obvious exception to the latter point comes with Bitcoin, which DOES CHANGE in
value. But Bitcoin will never become a serious competitor for state issued
money until it becomes fixed in value.

So
to summarise so far, the big advantage of commercial banks backed by FDIC seems
to be that they can issue a form of money.

Central
banks also issue money!

But
CENTRAL BANKS can just as easily create or supply the economy with a form of
money and at practically no real cost. Indeed they already do produce a portion of the money supply. So the latter apparent merit in letting
commercial banks have traditional depositors backed by FDIC collapses!

Put
another way, what’s the point in a system that CLOSES DOWN banks when they make
silly loans, if there is a system available (i.e. full reserve) under which
banks DO NOT have to close down when they make silly loans? There IS NO point!

A
flaw in Positive Money’s system.

Strangely
enough, while PM advocates full reserve, the PARTICULAR FORM of full reserve
advocated by PM actually retains the latter “close down” defect. That is, their
system is not a PURE full reserve system, and for the following reasons.

Under
PM’s system, there is no FDIC, and depositors who opt to have their money
loaned on (i.e. put at risk) are guaranteed £X back for every £X they deposit
until such time as the bank has clearly failed. And at that point, depositors
may have to accept a hair cut.

In
contrast, under Laurence Kotlikoff’s full reserve system, those who want their
money loaned on or put at risk buy into a mutual fund (unit trust in the UK) of
their choice. That way, it’s near impossible for lending entities (i.e. mutual
funds) to go bust. And for that reason, I prefer Kotlikoff’s system.

Indeed,
another strange characteristic of the PM system is thus. Say a bank’s assets
fall to the point where it is closed down, which is where its assets have
fallen to say Y% of its liabilities. That means that depositors will get Y% of
their money back, roughly speaking. But in the same scenario under the
Kotlikoff system, those depositor / investors would see their stake in the bank
/ mutual fund drop to Y% of its initial value. So under both systems, depositors end up with Y% of their original stake, but under the PM the bank is closed down, whereas under Kotlikoff's system it soldiers on.

Ergo
. . . the PM system, you could argue, involves closing down banks for
absolutely no reason.

Taxpayer
funded bank insurance.

In contrast
to FDIC, which as pointed out above is self-funding, an obvious alternative is
to have taxpayers stand behind banks or “fund bank insurance” if you like. The
latter system applies to large banks in the US (the so called “Too Big to Fail”
subsidy), and all banks in the UK. Or to be more accurate, there’s a sort of
TBTF subsidy in the US, but it seems the US government is prepared to let the
occasional large bank fail (i.e Lehmans) pour encourager les autres.

However,
TBTF is clearly even worse than FDIC, and indeed the declared objective of
those trying to bring better bank regulation, like the Vickers
commission in the UK, is to dispose of all bank subsidies, an objective they’ve
completely failed
to achieve .

Indeed,
the worthies trying to dispose of bank subsidies don’t seem to have the faintest
idea as to how to do it.

Thursday, 26 June 2014

I’m amazed by this passage from a recent post by Scott: “Since 2008,
the UK has run extremely large budget deficits, bigger than the US as a share
of GDP. Everyone agrees these are too large, and need to be reduced. But
Keynesians have argued that austerity should be very gradual, to avoid
derailing the recovery. That’s a fair argument…”.

Wow.

That’s in stark contrast to his previous
pronouncements to the effect that fiscal stimulus is a waste of time, Keynsians
are deluded, MMT (which incorporates a fair amount of fiscal in the type of
stimulus it advocates) is nonsense, etc etc.

I’m now baffled as to what Scott’s “Market
Monetarism” actually consists of. Assistance appreciated.However, I suspect he has changed his mind,
but hasn’t realized it or doesn’t want to admit it.

Non-peer reviewed (or only lightly peer reviewed) publications. The coloured clickable links below are EITHER the title of the work, OR a very short summary (where I think a short summary conveys more than the title).

i) The above is not a complete list in that earlier versions of some papers have been omitted. For a more complete list see here, and “browse by author” (top of left hand column).

ii) 7 deals with a wide range of alleged reasons for government borrowing, including Keynsian borrow and spend. 6 is an updated version of the "anti-Keynes" arguments in 7. 5 is an updated version of 1, which in turn is an updated version of 4.

______________

.

Bits and bobs.

.

As I’ve explained for some time on this blog, the recently popular idea that “banks don’t intermediate: they create money” is over-simple. Reason is that they do a bit of both. So it’s nice to see an article that seems to agree with me. (h/t Stephanie Schulte). Mind - I've only skimmed thru the intro to that article.________

Half of landlords in one part of London do not declare rental income to the tax authorities. I might as well join in the fun. I’ll return my tax return to the authorities with a brief letter saying, “Dear Sirs, Thank you for your invitation to take part in your income tax scheme. Unfortunately I am very busy and do not have time. Yours, etc.”________

Simon Wren-Lewis (Oxford economics prof) describes having George Osborne in charge of the economy as being “similar to someone who has never learnt to drive, taking a car onto the highway and causing mayhem”. I’ll drink to that.

Unfortunately SW-L keeps very quiet, as he always does, about the contribution his own profession made to this mess. In particular he doesn’t mention Kenneth Rogoff, Carmen Reinhart or Alberto Alesina – all of them influential economists who over the last ten years have advocated limiting stimulus (because of “the debt”) if not full blown austerity.________

Plenty of support in the comments at this MMT site for the basic ideas behind full reserve banking, though the phrase “full reserve” is not actually used.________

Old Guardian article by Will Hutton claiming the UK should have joined the Euro. Classic Guardian and absolutely hilarious.________

One of the first “daler” coins (hence the word “dollar”) weighed 14kg.!!! Imagine going shopping for the groceries with some of those in your pocket, or should I say “in your wheelbarrow”. (h/t J.P.Koning)________

Moronic Fed official reveals that GDP tends to rise when population rises. Next up: Fed reveals that grass is green and water is wet….:-)________

Fran Boait of Positive Money says the Bank of England "has no capacity to respond to a future crisis, and that puts us in an extremely dangerous position." Well certainly there are plenty of twits at the Treasury and at the BoE who THINK responding will be difficult. Actually there's an easy solution: fiscal stimulus, funded (as suggested by Keynes) by new money. Indeed, that’s what PM itself advocates. But it’s far from clear how many people in high places have heard of Keynes or, where they have heard of him, know what his solution for unemployment was.________

The US debt ceiling has been suspended or lifted 84 times since it was first established. You’d think that having made the Earth shattering discovery 84 times that the debt ceiling is nonsense, that debt ceiling enthusiasts would have learned their lesson, wouldn’t you? I mean if I got drunk 24 times and had 24 car crashes soon afterwards, I’d probably get the point that alcohol causes car crashes…:-) As for getting drunk 84 times and having 84 car crashes, that would indicate extreme stupidity on my part. No?________

The US Treasury has the power to print money (rather in the same way as the UK Treasury printed money in the form of so called “Bradburies” at the outbreak of the first World War).________

“Payment Protection Insurance” was a trick used by UK banks: it involved surreptitiously getting customers to take out insurance against the possibility of not being able to make credit card or mortgage payments. UK banks have been forced to repay customers billions. But that’s just one example of a more general trick used by banks sometimes called “tying”: forcing, tricking or persuading customers to buy one bank product when they buy another. More details here on the Fed’s half-baked attempts to control tying in the US.________

The farcical story of economists’ apparent inability to raise inflation continues. As I’ve long pointed out, Robert Mugabe knows how to do that. In fact Mugabe should be in charge of economics at Harvard: he’d be a big improvement on Kenneth Rogoff, Carmen Reinhart and other ignoramuses at Harvard.________

I’ve removed comment moderation from this blog. The only reason I ever implemented it was so as get rid of commercial organisations advertising something and posing as commenters. When doing that I noticed comments were limited to people with Google accounts for some strange reason. Removed that as well. ________

Article on money creation by Prof Charles Adams, who as far as I can see is a professor of physics at my local university – Durham. I can’t fault the first half of his article, but don’t agree with the second half which claims both publically and privately issued money are needed because we have a public and private sector. I left a comment.

Adams is nowhere near the first physicist to take an interest in money creation. Another is William Hummel. These “physicist / economists” are normally very clued up (as befits someone with enough brain to be a physicist).________

.

MUSGRAVE'S LAW SOLVES THE FOLLOWING PROBLEM.

The problem. Deficits and / or national debts allegedly need reducing. The conventional wisdom is that they are reduced by raising taxes and / or cutting government spending, which in turn produces the money with which to repay the debt. But raised taxes or spending cuts destroy jobs: exactly what we don’t want. A quandary.

The solution. The national debt can be reduced at any speed and without austerity as follows. Buy the debt back, obtaining the necessary funds from two sources: A, printing money, and B, increasing tax and/or reduced government spending. A is inflationary and B is deflationary. A and B can be altered to give almost any outcome desired. For example for a faster rate of buy back, apply more of A and B. Or for more deflation while buying back, apply more of B relative to A